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--Supporters say opponents are trying to drum up support for legislation that would permanently limit swipe fees

(Updates with names of banks in paragraph two, additional comment from attorneys and new details throughout.)

By Andrew R. Johnson

A federal judge on Friday granted preliminary approval of a $7.25 billion class-action settlement of litigation against Visa Inc. (V), MasterCard Inc. (MA) and several large banks over the protests of numerous merchants and trade groups that argue the deal is flawed.

The deal, announced in July, would allow the card companies and banks, including Bank of America Corp. (BAC) and J.P. Morgan Chase & Co. (JPM), to put to bed litigation that has lingered since 2005 over the fees merchants pay on each credit-card transaction, known as the interchange or swipe fee. Retailers had argued the defendants conspired to set such fees at arbitrarily high levels and bound merchants to rules preventing them from recouping the costs they pay to accept credit cards.

But in recent months a slew of merchants, including Wal-Mart Stores Inc. (WMT), Target Corp. (TGT) and Home Depot Inc. (HD), and trade groups such as the National Retail Federation and National Association of Convenience Stores, which is a named plaintiff in the litigation, have launched an attack on the settlement. They argue releases from future litigation granted to Visa and MasterCard under the settlement are overly broad and that changes to the card companies' rules, including the ability to surcharge customers who pay with credit cards, have too many strings attached.

U.S. District Court Judge John Gleeson said during a hearing in Brooklyn Friday that arguments raised by opponents of the deal haven't been persuasive enough to "derail preliminary approval," calling concerns voiced so far "overstated."

Attorneys representing opponents of the settlement after the ruling vowed to continue fighting the deal.

"We're not remotely daunted by today's result," said Jeff Shinder, an attorney with Constantine Cannon LLP, during an interview. Mr. Shinder represents the National Association of Convenience Stores, National Grocers Association and other named plaintiffs that have since come out against the deal. He said he expects "opposition is going to grow and intensify" as a result of Friday's ruling.

During the hearing before a packed courtroom, Mr. Shinder said the settlement "threatens to make a bad situation considerably worse."

Visa and MasterCard applauded the judge's decision.

"Our belief that the agreement will eventually receive final approval was strengthened today," Visa said in a statement. "As we have said from the beginning, this settlement is a fair and reasonable compromise for all parties."

Noah Hanft, general counsel for MasterCard, said in a statement that the settlement "represents a solution reached after years of litigation and months of negotiation."

Judge Gleeson last month stated in an order that the deal appeared to meet the threshold for preliminary approval. However, he noted the bar for preliminary approval is significantly lower than for final approval, which wouldn't come until next year.

Under the settlement, up to eight million merchants could receive payments totaling $6.05 billion. In addition, the settlement also calls for Visa and MasterCard to temporarily reduce swipe fees by an amount equal to $1.2 billion and would allow merchants for the first time to charge an extra fee to customers who pay with credit cards.

Visa and MasterCard don't lend or issue cards to consumers; rather, they operate networks that help process transactions for banks that issue cards and those that work with merchants. They also set the swipe fees that are collected by card-issuing banks as revenue.

Merchants will have the ability to opt out of the monetary damages portion of the settlement but are not able to opt out of the rule changes, a point of contention for critics who say it will be difficult to bring claims against the companies over potential misconduct in the future. Releases granted to Visa and MasterCard are effective now as a result of preliminary approval but would become void if final approval isn't granted.

The proposed settlement also has drawn opposition from competitors of Visa and MasterCard. American Express Co. (AXP), which isn't part of the litigation but faces separate class-action suits over its merchant fees, is worried the settlement would hinder its ability to bring antitrust claims against the card networks in the future, Philip Korologos, an attorney with Boies, Schiller & Flexner LLP who represents Amex, said during the hearing.

First Data Corp., a payment processor that handles transactions for merchants, voiced similar concerns.

The ability to surcharge along with other rule changes is set to take effect in 60 days.

Supporters of surcharging have argued the practice, which is allowed in some countries but prohibited by Visa and MasterCard in the U.S., would allow merchants to recoup the costs they pay for accepting cards. However, critics of the settlement argue that requirements retailers would have to abide by in order to surcharge would make it too difficult to put the practice in place.

The settlement would require merchants to notify the payment networks that they plan to have a surcharge, post signs notifying customers of surcharges and prevent them from surcharging more than what they pay to accept cards. Critics of the settlement also note that 10 states have laws prohibiting the practice, so merchants wouldn't be able to charge an extra fee at locations in those states.

"There's so many limits on it and so many issues with it that it's hard to see" how merchants will take advantage of it, Mr. Shinder said.

Attorneys who negotiated the deal on behalf of the proposed class of merchants defended the settlement, arguing that it includes substantial reforms for merchants.

"The injunctive relief is meaningful," Laddie Montague, an attorney with Berger & Montague PC, said, adding the rule changes will allow merchants to put "downward pressure on the interchange rates."

Montague and other supporters accused trade groups and some merchants of spreading misinformation about the deal in order to drum up additional opposition.

"It's a lot of smoke, and there's very little fire," said Richard Alan Arnold, an attorney with Kenny Nachwalter PA, who accused settlement opponents of engaging in a "propaganda campaign." Mr. Arnold represents several retailers, including Kroger Co. (KR) and Safeway Inc. (SWY), that reached a separate but similar settlement with Visa, MasterCard and the banks.

Judge Gleeson said he plans to appoint an expert counsel to analyze the potential financial benefits of surcharging to determine its value to merchants.

Supporters have accused opponents of trying to garner support for legislation that would permanently lower swipe fees. Similar legislation took effect in October 2011 per a provision to 2010's Dodd-Frank financial overhaul law called the Durbin amendment. The Durbin amendment cut in half the fees that merchants pay to accept debit cards, but it didn't affect credit-card swipe fees.

"The objections from retailer lobbying groups are largely politically motivated, in hopes of influencing Congress to give them even more political handouts," Trish Wexler, a spokeswoman for the Electronic Payments Coalition, which represents Visa and MasterCard, said in a statement.

MasterCard's shares closed up 0.6% at $464.66 on Friday, and Visa's shares closed up 0.6% at $142.93.